S&P/ASX 200 VIX (A-VIX)

The S&P/ASX 200 VIX (A-VIX) is a real-time index that reflects investor expectations about volatility over the next 30 days in the S&P/ASX 200, the Australian benchmark equity index.

The S&P/ASX 200 VIX is used mainly as a barometer of market sentiment. As with other volatility indices, a relatively high A-VIX reflects uncertain investor expectations and wider trading ranges, while a lower A-VIX suggests investor confidence and narrower trading ranges.

The S&P/ASX 200 VIX (A-VIX) leverages mid-prices for put and call options on the index to calculate a weighted average of the implied volatility of these options. The index interpolates volatility of the options closest to maturity, relative to those of the options farthest from maturity, to derive a 30-day indication of expected volatility in the equity benchmark.

Like other VIX indices, the A-VIX displays a strong negative correlation with the underlying S&P/ASX 200 index, enabling market participants to position their portfolios for anticipated market changes. The launch of S&P/ASX 200 VIX futures in October 2013 enabled traders to speculate directly on expected changes in Australian equity market volatility in a single transaction.

The S&P/ASX 200 index covers about 80% of Australian equity market capitalization, and is home to global mining giants such as BHP Billiton and Rio Tinto, as well as large banks like Commonwealth Bank Australia and ANZ Banking Group.

The underlying ASX is a vertically integrated exchange group that is among the world’s largest in terms of market capitalization.

The A-VIX tends to be more forward-looking than other indexes that reflect the present level of volatility in an underlying index.

Aggregating the implied volatility for each component of the index projects the opinion of market participants about how much they expect the overall index price to change in the near future. This allows traders to speculate on whether the volatility will be lesser or greater than the expectations, for example. It also allows contrarian traders to position for possible market reversals in either the A-VIX or ASX 200 when the A-VIX reflects extreme sentiment to either the upside or downside.

The A-VIX is used mostly by traders, as opposed to investors, however. Investors in the Australian stock market with strategies that incorporate market timing may watch the A-VIX for cues about what might happen to the underlying index in the coming weeks. However, many tend to ignore such shorter-term signals, preferring to stick with fundamental analyses that tend to focus on the longer term. For this reason, few formally include the A-VIX into their investment approaches.